Spectrum acquisition is good for the next couple of years

Rajan S Mathews, Director General, Cellular Operators Association of India (COAI), talks about how the scope for further consolidation is going to continue to stress the industry for some time, the October airwaves sale, and the controversy around Reliance Jio´s entry.

What does the outcome of the October spectrum sale indicate about the mood of the Indian telecom market?
It´s a very positive outlook. Nobody puts in $10 billion in investments if they are not serious about the future of the industry. All of the major operators have by virtue of their bids indicated that, one, they are serious about the market because it´s a 20-year license, and, therefore, they intend to continue to make investments in networks as well. Secondly, because of the resources that are going to be required to be an effective competitor, consolidation is going to be critical in terms of the number of players. You cannot have so many players fragmenting the industry. From a high of 12 to 13 operators per circle, we have come down to effectively five. That is going to be the pressure on the industry on how much further there is scope for additional consolidation, because resources have to be augmented. The spectrum that is acquired is probably good for two to three years. We all understand that video is going to be a significant demand feature, especially in urban areas. As people require higher speeds, we expect the demand for spectrum to grow, as that is the only major network we have in India.

If one goes by recent media reports, the spectrum sale was a flop. However, you have taken a contrarian view by terming it a success.
I think what people got focused around inappropriately was the 700 MHz band. That ended up being the tail that started wagging the dog. If you look at the whole spectrum auction, the amount of money that was supposed to come, 60 per cent of the total projected proceeds were supposed to come from there. The other number that got into the headline, unfortunately, was the assumption that if all other spectrum got sold, then Rs.5 lakh crore, or whatever the number, would be there. But everybody knew that 100 per cent of the spectrum wouldn´t get picked up. And certainly because of the pricing on the 700 MHz, it would not be attractive for the operators. If you take out all these anomalies, the results are very encouraging, both in terms of optimism of operators in the industry and what customers can expect. For the first time, it is not about keeping your business; it´s about growing your business. If you are going to grow the business, clearly it is focusing on what is the customer going to need, what is his experience and how do we make sure that I have enough spectrum.

The other thing that we have to look at when we parse the actual results, surprisingly to many people including myself, 23 and 25 MHz spectrum was bid quite actively. Though 1,800 MHz was clearly the focus of the auction, and rightly so as it´s the most evolved ecosystem, I think what emerged is because Reliance Jio rolled out 4G in 2,300 MHz, people saw that the ecosystem is developed. Reliance pulled that through with VoLTE becoming a viable technology in terms of voice. This showed that all operators are looking at 4G LTE as the service for the future.

During the recently concluded airwaves auction, the government was unable to sell any of the lucrative 700 MHz frequency. Amid reports of differences between the telecom ministry and TRAI over spectrum pricing that culminated in sale of only 41 per cent of the total spectrum, do you think COAI´s stand over its exorbitant pricing and lack of ready-to-use infrastructure has been vindicated?
Certainly, in terms of bidding and outcome of the auction. Vindication may not be the right term, but the reality of what we were saying that the price was too high, and especially having to buy it now. The two points we made were, why not wait for two years because we need to have the ecosystem develop and price it reasonably. Both of those things obviously didn´t happen. The government decided to go ahead with the 700 MHz and, secondly, it decided that the price would be this high number. Both of those in my mind proved to be factually correct from the perspective of the operators.

After the government was able to sell just a little over 40 per cent of the radio waves in October, you had said that telecom companies cannot afford to bid for more spectrum for the next couple of years, even if the government were to organise another auction. So, what´s next?
Most operators have got enough spectrum to meet their needs for the next three years or so. Therefore, the objective and priority of every operator now is to start investing in the network. The focus is now operational. Previously, operations and quality of service were suffering because we didn´t have enough spectrum. Now because of these auctions, the quantum of spectrum is not an issue. Therefore, operators have to and must focus on quality of service. Now the question is, what´s the differentiator? That for everybody is going to be, what is the consumer experiencing? In the old days, I had to only worry about one quality of service, which is the voice quality. Now voice clarity is ´an issue´ but not ´the issue´. The other issues that now climb to the top of the priority for consumers are speed, coverage and data, pricing of handsets, and affordability of service.

In your written response to TRAI´s consultation paper on interconnection user charges (IUC), you have urged the telecom regulator to defer the review of the same till March 2017. What more clarity are you seeking?
There must have obviously been some rationale when the regulator said that we are not going to touch interconnect for three years. The rationale that was offered was there was a need for bringing in certainty, clarity and consistency in the marketplace. If you constantly go into the market and change parameters of when I can earn my costs, it disrupts the original investment criteria that I had while bidding for spectrum. That is why, both from a policy perspective and regulatory perspective, just about every regulator and government emphasises it should be clear, transparent, non-disruptive, and allow for a certain period to allow for these things to settle down. In the IUC regime, the regulator did not use what is called the historical cost model. The regulator, for the first time, moved from a historical cost model to a long-run incremental cost model. If you had done your work, you would have factored in that networks are now all pretty much (based on) Internet Protocol (IP). By definition, you would have factored these innovations and potential developments. The only thing that was tweaked was the cost of spectrum, because in India we have raised the cost. In our opinion, at not at a high enough level, but at least it still got into the calculation. We told the regulator that by its calculations, in the IUC paper, it had redone what we call the long-run incremental cost (LRIC) model, as was done two-and-a-half years ago to come up with the same 14 paise IUC charge. So, there was no change in the model. Why this rush when consistency and all of this is there?

In September, none of the telecom operators bid for a government-funded rollout of mobile networks in uncovered parts of the Northeast region under the Comprehensive Telecom Development Plan approved by the Cabinet two years ago. Why?
We are all for government-sponsored programmes, especially viability gap funding and other devices to ensure that non-covered areas are there. Our concerns were in the following order. For one, it defined equipment to a group of vendors that we thought was kind of not appropriate. And what I mean by that is that it was low-power base transceiver stations (BTS). These are not standard BTS, but unique. The standard BTS puts out 20 watts, these are 2 watts. So, they have a very small footprint. The reason and rationale used are that supposedly the power consumption is low as you can use solar panels. Because you use solar panels, diesel and other maintenance costs are lower, subsidies are lower, and it becomes viable. Those are not inappropriate arguments but our point, therefore, is that you restrict equipment availability by doing this.

The second point is that by restricting the equipment, you are not allowing a proper migration to 3G and 4G. This equipment is purely to provide voice connectivity and marginal data. It clearly wasn´t suited to meet the Prime Minister´s vision of a connected India where everybody was going to have access to the Internet. So, why are you investing in a technology that is going to constrain you, vis-a-vis the ability to move forward? We said now that we have photovoltaic cells, you can really do away with gensets and all of that. Thirdly, this is in the Northeast, where there is a big rain shadow area. So, part of the calculation of the costs did not factor in that not all sites would be amenable to solar panels. It was quite clear that in these areas, you are not going to be able to connect through fibre. When you look at the terrain, we felt that the proposal had undercounted the number of microwave sites that would be required to provide coverage. The final point we raised was there was a preferential market access (PMA). We said we obviously support Make in India, but its terms need to be relaxed in order to allow more people to provide the necessary equipment.

Reliance Jio has been particularly critical of COAI´s style of functioning and has demanded a complete overhaul of your rules, regulations and processes. What´s your view?
In the heat of battle, we say and do a lot of things. My point is, at the end of the Mahabharata, everybody suffered. One, we should understand that every time a new operator comes in, the industry goes through an adjustment phase. We were perhaps too nanve to expect that the operator of the size and dimension of Reliance would not create some turbulence in the industry. We should have expected that there would be some sharp elbows. And, of course, Reliance is going to use its muscle to position itself. Please understand that we are all in this for commercial issues. Of course, the commercial issues cannot ignore the issues of the consumer. But the back end of that is the interconnect. Some incumbent operators whom we represent raised certain issues. And we tried to make the distinction at two levels. We are saying there are bilateral commercial arrangements that we don´t get into. But are there industry-wide issues that need resolution.

Unfortunately, it went against the issues we raised. Obviously, that didn´t sit well with Reliance as it impacted them. We raised the fact that when did your commercial service begin? That´s important because according to regulations, the point of interconnect begins when commercial services commence. The first point we said is how long can the testing period last, and what was its scope and scale. It was recognised as ¨vague¨, because the DoT said it didn´t know. And then the DoT by reference had to ask TRAI to clarify it. The second thing that the industry raised was that under the normal interconnect protocols, the fact is that you are now offering the service at the volume levels to about 10 to 15 million customers, using 100 per cent ¨free service¨. That was a one of a kind. Never, either on a test or launch basis, was there ever this magnitude of load factors on the networks, which created certain challenges for both incumbents and new operators. This obviously got escalated. When COAI was formed in 1994, we arrived at a proportional voting structure according to the existing association such as NASSCOM, etc. All of them have a proportional voting structure. It says that any person who is a member of the association gets the number of votes relative to number of subscribers. Why? Because the larger you are, the larger your representation in the market. But it´s capped, so you don´t go on to become the sole dominant member. We made sure that at least three operators were required to form a majority. The second point is that one also bought the expenses of the association in the same proportion. Two years ago, when we invited Reliance to become a member, we gave them our rules and regulations. Please remember, there is a competing association called Association of Unified Telecom Service Providers (AUSPI), which has one member, one vote. They had every reason to look around and say, ¨Hey, we find this is an onerous restriction,¨ and join AUSPI. For two years, this was never an issue. Lots of votes were taken and lots of decisions made. Obviously, when it came to this particular issue, the association made a decision based on existing rules which they found to be onerous. We don´t believe that it needs to be changed. But we are always willing to listen to our members.

The GSM operators´ association now seems to be on the back foot even after expressing its disappointment over the `3,050 crore penalty for allegedly denying interconnectivity. What has led to this change in your stance?
We have not changed our stance. We have basically said that TRAI must investigate the matter. There was also this whole issue of what is called discriminatory pricing. There was a technical order called Telecom Technical Order (TTO) issued by TRAI in 2011, which specifies in the reading and interpretation of majority of members that interconnect price was intended to be the floor for a retail price. So, if it is 14 paise, the retail price is not supposed to be below that level. By the way, this has been used in SMS and other categories. TRAI itself has used language such as ôthe intention is to avoid predatory pricingö and ¨cross-subsidisation¨ and that is what a majority of COAI members decided was the reading of that. That too was put out to TRAI asking it to take a look at, one, volume of traffic. In the TTO, does this mean that when they offer free voice, they offer this promo for more than 90 days, which is a regulation? Because where other member operators are concerned, they received a letter from TRAI on the 29th day of their promo! The regulator was asked for clarification. The regulator has investigated the matter and has made certain findings. Notices have been issued that have now been referred to DoT. Our point is that we are not taking any sides in terms of the law. We are only saying that legitimate issues where the regulator must step in to resolve these inter-operator issues, it must do in a timely and quick basis.

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